Life after the Crisis: A Perspective from Emerging Europe and Central Asia

The Program of Seminars takes place outside the formal framework of the Annual Meetings. But to many people, they were the main reason for making the trip to Istanbul.

The program's October 4 offering included a first-hand perspective of how three emerging market countries—Turkey, Slovakia, and Ukraine—have weathered the crisis. We also got a glimpse of the methodology the IMF is using to become better at sounding the alarm if it sees new vulnerabilities building up in the world economy.

More Europe, not less

Ukraine was running a high fiscal deficit at the outset of the crisis, which made it vulnerable when the global economy came unstuck, Vice Prime Minister Hryhoriy Nemyria said. The lack of progress on structural reforms had reinforced the external shock, and had brought home just how dependent the country was on just one sector, steel, which accounts for 40 percent of all export earnings.

Global economic crisis brought home how dependent Ukraine was on just one sector, steel, which accounts for 40 percent of all export earnings (photo: Viktor Korotayev/Reuters)

Sounding hopeful that upcoming elections will bring more political stability to his country, Nemyria said he would hate to "waste a good crisis," and that he was eager to press ahead with energy sector reform and a new free trade agreement with the European Union, to mention only two of many priorities. But, he said, Ukraine is having to carry out all these reforms without a European anchor, making an already difficult task that much harder.

Chiming in on this, in characteristically trenchant terms, Willem Buiter of the London School of Economics said that "the European Union has completely failed not only Ukraine but also Belarus, Moldova, and Georgia by not playing a more active role and holding up the prospect of EU membership."

Lessons learned the hard way

Turkey has had a good crisis, insofar as there is such a thing, Deputy Prime Minister Ali Babacan told the packed auditorium. He said the crisis Turkey experienced in 2001 had prompted the country to clean up the country’s banks, leaving them in good shape to weather the current crisis. But in general, he said, it is very difficult for governments to put the brakes on "when everybody is happy," even though it is quite clear the banks are lending too generously.

Turkey had also learned other lessons from its earlier crisis. After years of living above its means, it stabilized its fiscal deficit around 3 percent of GDP and brought public debt below 40 percent of GDP. "So when the crisis hit, we had room to absorb some of the shock," Babacan said. Still, with unemployment now standing at close to 15 percent, Turkey has much to worry about. "Governments should swallow the bitter pill of reforms today, before the feeling of urgency fades away," Babacan said, pointing to his government’s new three-year plan.

So alike, and yet so different

For Slovakia, one of only two countries in central and eastern Europe to have adopted the euro, the eurozone had provided a safe haven during the crisis, said Ivan Mikloš, a former deputy prime minister and minister of finance.

Speaking more generally about emerging Europe, Mikloš said that a flexible exchange rate and less borrowing in foreign currency were two factors had helped Poland and the Czech Republic. The three Baltic republics had suffered more because of their fixed exchange rates and high fiscal and current account deficits. The latter was something they had in common with Hungary, one of the first countries to seek assistance from the IMF.

Help or hindrance

Much of the discussion centered on the IMF’s engagement in the region. The moderator, Martin Wolf of the Financial Times, wanted to know whether Turkey regarded its relationship with the IMF as having contributed to the country’s successful transformation.

After 17 uncompleted Stand-By Arrangements, the Turkish government had decided to take full ownership of the policies agreed with the IMF, Babacan said. "We didn’t agree to anything we did not want to do". As a result, the last two Stand-By Arrangements had both been completed successfully, and the government is currently mulling whether to seek a new arrangement with the IMF. "Views have been converging over the past 4–5 months," he said.

"The IMF had played a vital role in helping Ukraine survive the crisis," Nemyria said. He said the IMF had "shown a more human face" and a better appreciation of political realities, perhaps because the mission chief for Ukraine was from Turkey and understood what it was like for an emerging market country to be convulsed by crisis. For instance, the IMF had agreed to move from a balanced budget to a fiscal deficit of 6 percent of GDP in response to growing pressures on Ukraine’s budget.

Preventing the next crisis

On everybody’s mind here is whether it will one day become possible to prevent crises from happening. Ideally, an early warning system would flag growing vulnerabilities sufficiently in advance—and sufficiently convincingly—to allow policymakers to take corrective action. Pricking asset price bubbles, restricting unhedged foreign currency exposure of banks or borrowers, limiting leverage, and requiring higher capital ratios are all examples of ways to reduce the buildup of vulnerabilities.

The IMF and the Financial Stability Board have been working on improving their early warning capacity and presented their new methodology at seminar here in Istanbul. There was much interest from policymakers. But as Minister Babacan had pointed out earlier in the day, measures to prick bubbles are hardly likely to be popular: home-owners would prefer to see a rapid increase in the value of their house, borrowers may be able to borrow more cheaply in foreign currency, and financial institutions do not like to have to hold more capital because it erodes their profitability. So even if crises could be predicted, it remains to be seen whether there will be sufficient political will to do what is necessary.